Things to remember when investing for children's future

Indian parents spend a considerable amount of time worrying about their child’s future. Most of which is triggered by the concern over their ability to finance their child’s aspirations and dreams. Saving and investing for children’s education and marriage is one of the most important financial goals for most parents.

Our in-house research shows that school fees, tuition fees, and other associated expenses have risen by 150% in the last 10 years. The average annual expenditure on private schooling has risen by 175% in the same period, while the cost of professional and technical education has gone up by 96%.

A child’s higher education costs 18.3% of total household income in Urban India. But the reality is only a small percentage of parents actually plan for child education, with specific investments demarcated for the same. As a result, increasing aspirations and education costs are funded by borrowings and education loans. So what should a parent do? Here are five top things to keep in mind:

Start early

Rising inflation makes future financial requirements for a child such as education, skill development, non-academic career aspirations, and marriage more expensive.

Hence, it becomes important that parents plan for their children’s future needs early on and give sufficient time for these investments to grow. The earlier you start, the greater are the benefits you will reap. For instance, if you start saving and investing as soon as your child is born, imagine the corpus you can accumulate when she reaches the age of 18.

Don’t forget to invest

Even as parents plan for their children’s future, they tend to miscalculate the cost of future financial requirement and do not choose the right investment option. Given the nature of returns and time-horizon required to plan for a child’s future, equity mutual funds can be a good option. Among equity funds, there are certain solution-oriented equity funds that are specifically designed for children’s future, and their lock-in period develops the habit of investing over a consistent time period. Choose the right investment avenues to generate optimum returns on your investments.

You have to let your money work hard for you and investing is the right way to approach it.

Be disciplined

Financial discipline is one of the most critical factors to meet your long-term financial goals, and financial planning for a child’s future is no short term goal. It requires meticulous planning as well as a sustained approach to build a corpus, keeping in mind the nature and variety of expenses involved.

Whatever you choose as an investment option, make sure it is consistent and regular. Mutual Funds provide a brilliant option to address this by way of a Systematic Investment Plan, popularly called SIP. The other important aspect of investing is to not get influenced by market noises and stay on course with your investments.

Use mutual fund value-added products

The SIP-based investment ensures investors remain disciplined and their financial plan is on track as a predetermined amount is automatically deducted from their bank account over periodic intervals and invested in selected mutual fund schemes.

SIP also averages the cost of units during market corrections and eliminate the need for timing investments. SIP enjoys the benefit of compounding which helps in providing inflation-beaten returns. Compounding helps you gain exponential growth over a time period. The earlier you start investing and the longer you stay invested, the higher would be your potential returns from compounding. A Step-Up SIP enables an investor to incrementally increase their SIP outgo. An investor can opt for this to plan their child’s future by increasing their SIP amount as the child grows.

Diversify through asset allocation

Investing in asset allocation is one of the most important steps. Diversifying your investments across various asset classes provides a balance to your portfolio. Within mutual funds, you can bucket it in 4 categories: Wealth solutions, Income solutions, Tax-saving solutions and Savings solution. Mutual fund schemes can be categorized under these four buckets and there are enough variations to address all four needs.

You can consult your financial advisor as to how much should be invested in which category as per your goals and risk appetite.

Considering this five-step approach, a well-structured financial plan for your child should not be such a tough task.

(The writer is MD & CEO, Aditya Birla Sun Life AMC Limited)